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Large organizations are difficult to manage as one segment. According to Siegel and Shim (2006), to enhance performance accountability, an organization should have separate segments, each segment with its own resources (p.166). The segments are common known as responsibility centers and they should be responsible for their performance. The responsibility centers fall into four main categories viz. cost, revenue, investment, and profit centers (Warren, Duchac, & Reeve, 2010, p.1010). Each responsibility center should have a manager who controls the activities of the center and is accountable for its performance. Cost centers do not generate revenue but incur cost when carrying out its operations, investment centers generate revenue and incur cost revenue centers generate revenue but do not incur the cost, while profitability centers are in charge of managing the other centers (Needles, Powers, & Crosson, 2007, p. 353).
ABC, a multinational corporation, manufactures and sells computer hardware worldwide. The company has three divisions and each division has its own production unit but the functional units are in the companys headquarters. Each of the division reports directly to the main company, but production operations are independent. The division managers have to deliver monthly reports to the headquarters showing their budget estimates, actual performance, and variance on production cost.
Top management of ABC uses responsibility management as a tool to evaluate the divisions production ability to minimize cost of production, but still produce quality computer hardware. Reports from the divisions reflect the direct material costs, direct labor costs, and manufacturing overheads. In addition, the reports indicate the budget estimates, actual cost incurred, and variance.
ABC has given the three departments the autonomy to adopt strategies that allow them to reduce cost during production of the computer hardware. All the divisions have access to equal resources, which are outsourced by the headquarters. All the divisions produce the same number of computer hardware per month and this enhances performance comparability between the divisions. If a divisions performance has been consistent, top management offers all employees of the division end of year bonuses.
For the month, of December 2010, division:
- showed favorable variance of two thousand dollars; division
- showed an unfavorable variance of five hundred dollars, while division
- showed a favorable variance of one thousand five hundred dollars.
Responsibility accounting has advantages to both top-level management and responsibility centers. In a large organization, top managements ability to delegate some responsibilities to lower levels leaves them with ample time to do other pertinent activities such as planning (Hall, 2008, p.424). Moreover, the responsibility centers are able to set targets, which offer guidance and act as a motivating factor.
In ABC, Division A and C had favorable cost variances, hence are able to cut on production cost considerably. However, division B exceeded its budget estimates by five hundred dollars. Top management held a meeting with the managers of division C to evaluate which activities were driving the divisions, costs, and strategies to achieve cost reduction in the division.
In conclusion, responsibility accounting is a tool through which large organization can enhance accountability in its divisions or departments. Accountability management devolves power to cost centers, which are responsible for performance. The strategy helps top management to concentrate on vital functions such as planning on top of motivating the responsibility centers towards meeting the set objectives.
References
Hall, J. A. (2008). Accounting Information Systems. USA: Cengage Learning.
Needles, B. E., Powers, M., & Crosson, S. (2007). Managerial Accounting. USA: Cengage learning.
Siegel, J. G., & Shim, J. K. (2006). Accounting handbook. USA: Baron Educational Series, Inc.
Warren, C. S., Reeve, J.M. & Duchac, J. (2010). Accounting. USA: Cengage Learning
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